This temptation is completely understandable, but it is important to note that Ms O’Dwyer was previously the Parliamentary Secretary to the Treasurer from December 2014, and is a former executive with the National Australia Bank. Ms O’Dwyer therefore more than likely has a very good understanding of our industry and how it works.
It might be a better idea for advisers to talk to their federal and state members about the great work they do protecting the lives and livelihoods of everyday Australians, so that members have positive messages to convey about the advice profession when they meet with Ms O’Dwyer. This approach will also give Ms O’Dwyer some time to get her feet under that desk, so to speak
However, while this is happening, I do believe that as a community, we should think again about what our industry really needs in the way of reform, what we can do in order to move forward and the best way to communicate that to Ms O’Dwyer.
What’s wrong with hybrid?
That takes us back to ASIC Report 413. The report identified that 93 per cent of all advice given under a hybrid model was in fact sound advice – this means the failure rate of a hybrid model is only 7 per cent. So, instead of attempting to halve the revenues of small businesses in Australia by going from a theoretical 120 per cent upfront commission to a maximum of 60 per cent, surely we should be looking at restricting remuneration to a maximum in a hybrid model?
Let’s also consider how the 60 per cent idea came about. At Synchron, we believe it is an attempt to satisfy loud consumer groups which saw 120 per cent, took it at face value and decided it was far too much commission to be paid to an adviser. These groups apparently made an arbitrary decision that advisers should get paid half that. We have yet to see any justification, evidence, research or reasoning to support this arbitrary decision.
We have, however, seen evidence that the 120 per cent is theoretical – even mythical – because it is applied to net premiums. That is, the premium minus the policy fee, frequency loading and so forth. The actual maximum commission paid to advisers was more in the vicinity of 96 per cent, including GST – so less than 96 per cent goes in the adviser’s hand.
The commission model that we believe is sustainable is 80/20 with a two-year responsibility period. This would help allay the fears of those who – mistakenly, we think – believe that the churn debate is actually real. That is the model we think needs to be brought to Ms O’Dwyer’s attention.
What’s wrong with clawback?
Our biggest concern with the LIF is the proposed three-year clawback, because that stands as the most inequitable element. It’s very important we ensure Ms O’Dwyer understands the impact that the introduction of clawbacks will have on the sustainability and viability of financial advice practices, most of which are small businesses. It’s also important that she understands that should small financial advice practices be forced out of business, consumers will have less choice in where to obtain life insurance advice, which may in turn worsen Australia’s already serious underinsurance problem.
New thinking for a new era
All that said, while clawbacks seem very unfair on advisers and their businesses, the fact of the matter is that, at the moment, there’s no real disincentive to re-write business every second year and we have to fix that. We have to kill our love affair with yearly renewable premiums and look towards solutions such as those highlighted to us on our visit to the UK earlier this year. This visit revealed that most life insurance policies in the UK are based on a level premium set-term basis. It’s a solution which addresses sustainability, affordability and remuneration structures, and puts the nail in the coffin of perceived issues of churn.
What that inevitably means is that we need new product design from insurers. We need a product which solves the perception issues that currently tarnish our industry and when we have it, that’s the solution we need to take to Ms O’Dwyer.
Don Trapnell is a director of dealer group Synchron
Other articles written by Mr Trapnell can be found here:
Be careful what you wish for
Why consumers need life insurance advice
The view from London
Pull the other one
Creating clear, concise SOAs
Well said Don & it makes sense! 10 years ago I decided to break with the Up front model & went Hybrid without any exception. Funny thing, I wrote double the business in that first year! It’s all about activity & attitude so don’t look for excuses! My business tripled in value over time & I am now half way through a buy out via a succession plan, but staying on in the business. The 3 year responsibility period is very unfair, 2 years is workable, it was the same when I joined the industry 28 years ago!
Scott, you’re right, a hybrid model is “very sustainable” so I would encourage you to adopt that model, it will pay massive dividends in the long term. It’s a brave new world on the horizon, fortune favours the brave !!!
MLC – I wouldn’t ever mention ‘paid conferences’ again. Those days are gone & how does a life company paying for you to go to a conference benefit the client?
All makes sense to me, which always scares me as it means it won’t end up happening. ASIC won’t move back to upfront with the report which was undertaken by them, though there are some concerns about doing research to find a predetermined answer, and a practice should be sustainable on an 80 / 20 basis.
Don, you’ve really missed the mark with how you envision this working. Based on your previous pieces, i am quite surprised.
Yes, 93% of advice provided on a hybrid basis was compliant. ALL this means is that the better advisers choose a hybrid commission – that is literally all it means, nothing else. They aren’t providing poor advice because of the commission, they are providing poor advice because they are poor advisers.
The way you’re explaining it is if we get rid of upfront commissions then all of the poor advisers will all of a sudden no longer exist. There is no logic to this at all. If you eradicate upfront commissions, the worse advisers will simply be forced to move to hybrid. Their advice will still be just as poor as it was before, nothing will change.
Don who made you the expert, Hybrid are you serious? As advisers we have already lost VB, paid conference, education, seminars, training and reasonable PI prices, then we have had to endure dealer costs my business pays out $32,000.00 in dealer splits, $12,000.00 in dealer fees, $17,000.00 in PI add to that CPD and conference another $14,000.00 a year and you think we should submit to less are you joking no not at all once I pay my support staff and running costs I’m left with nothing, the only way forward is 80/30 and all existing business brought up from 10 to 30% the new assistant treasurer is also looking at education I don’t believe it needs to be a Uni degree, churn if you don’t review your clients policy every year you are negligent, price is a major factor, a 20% increase is a major increase
Don, Well put. I agree with you and the Hybrid 80/20 would seem fair. It is actually a shame that so many advisers failed the SOA test no matter what Commission they were on, that was a kick in the face for all of us that work hard for best practice principals.
I have worked in Life co. Management 13 years, then owned my own Risk Practice 17 years and have recently sold to a highly respected Planning firm to do the Risk work for the 2 partners.
Being not quite 60 it seems a good choice and for many reasons I believe it still is.
However I am now not in management with a Life company so no guaranteed monthly income there, I am also not a business owner so wont be collecting any renewals again, but will be on a 50/50 Commission only arrangement. I am fine with that as I have always looked at the commission/revenue as a Success Fee (Means that I have educated my client and they have made an intelligent informed decision on what best suits their Needs and Objectives).My point is I have a lot of experience and knowledge and working on 50/50 of 60% will see a great number of people like me leave the industry.
It should also be noted that as a business owner every dollar goes into the pot to pay for the running of the business but in Risk we have an Obligation and Duty to assist our clients at claim time no matter how much time or how long it takes without charging a fee!!!. So if we see a reduction in the amount paid to the Adviser we will see in the Risk industry what I have seen form the Planning side. No assistance to clients on claim as it will be unaffordable. (Having worked on a number of Pro Bono claims)
Don, this a great story we need to tell the pollies once again what we do. Also, that taking 270 mil in risk commissions out of the economy year 1 will greatly hurt small businesses and lead to unemployment. Some parties think it only takes 10 minutes to take on a new client but, research shows it is 16 hours at least. General insurance is 3 hours we need to wind back the clock somewhat in between. Let’s keep striving and thriving as Mr Aaron Zelman advises us the risk community.